You can see the performance of my Old Mutual Global Strategic Bond fund in the screen grab of my portfolio below: in sum, Stewart Cowley, the guy who runs the fund, is a bond ninja, doubling the benchmark return over the last three years. But only to the tune of 23%. And over the past year he’s only returned 5.5%. Still, it's enough to convince me he must know what he is doing.

Nonetheless, wouldn’t I be better off holding more shares?

Maybe. But as a novice investor it would feel counter-intuitive to sell out of something so good – Cowley seems to be able to spin a profit even with two thirds of his fund in government bonds – but then of course I know you are supposed to sell on a high.

What’s more, holding the fund means I have a more diversified portfolio, not just a bunch of shares.

There's no bravado this week. I feel genuinely too dumb to know what to do. This is my toughest investment challenge yet.

There is little doubt that some bonds are looking expensive, and possibly in bubble territory - but other bonds such as short-dated ones may still be worth holding. By having a strategic bond fund your fund manager can choose the best bonds for different market conditions so no pressing need to sell unless you believe inflation is going to take off in a big way.

More generally, however, you should perhaps consider whether it is worth investing such relatively small sums in shares and investment trusts, given the dealing costs and stamp duty involved. Better to stick to funds or ETFs.

Look at the long term performance of that fund compared to (say) Kames Strategic Bond. I hold both, and the latter has done well lately, but Old Mutual has performed better as a "steady Eddie" over a market cycle.

My view is to keep holding until you feel your portfolio needs rebalancing.

I've 10% each of the M & G Optimal Income Fund and Kames high yield bond Funds in my portfolio. Both of them have served me well and like most who visit these forums will be watching the forward play over the coming year or so with this type of investment.

Corporate bonds that I follow all seem to have peaked and have started to slip; two bonds I hold have gone from a 7k paper profit to an almost 9k loss in less than a week; if the prices fall much further I'll INCREASE my holding of one of them but it can be a risky business just like any other investment.

I tried to sell 10k of one of the two above last Thursday but my broker wasn't able to make up the 50k minimum nominal order. Dammit; I should have sold the whole of that particular holding as I had enough to trade 'solo'.

Holding your own portfolio of bonds is even better; you can have zero management charges as well as doing far better than the returns you get from funds.

Risky?

Yes, but so is everything including holding capital in a fund performing not very well.

You have to use a little probability theory and establish the fact that not all bonds will last the distance to maturity and understand that taking a profit as yields tumble when prices rise can make sense [just as buying when the rest of the world is panicking can be very, very profitable with soaring yields to live off!].

Already made my decision to get out about a month ago. And transferred the proceeds into aggressive funds across likely strategic areas such as agriculture and biotechnology. Thus far, I certainly do not regret same. The bond bubble has probably deflated rather than burst suddenly. Degonfler the French call it! Which means both to deflate and as degonfle [ 2 acute accents ] means "chicken" in the scared sense. Fits my feelings, either way.

Is there really any sign that we are out of the world of low interest rates yet? What I understand is that the USA is committed to printing money into the foreseeable future to keep interest rates low, and the position at the BoE is not that different. Instead of giving money to the commercial banks via QE they are now doing something very similar with schemes for cheap money for lending.

Increasingly the control of inflation is not the priority.

The low interest rate environment exerts an upward pressure on the price of both bonds and equities. This is because risk adjusted cost for a particular rate of return is increased. When (and if) interest rates move up significantly this will tend to exert a strong downward influence on the economy. In the property markets, repossessions will increase, and property values will fall, as will the valuation of the banks loan books.

Gilts are a little bit of a special case. This is because in this instance the BoE competed in the market for a limited supply, thus forcing the price up to unsustainable levels. The focus on gilts alone has strained the linkage between the pricing of gilts and the pricing of commercial bonds, so a cessation of QE purchasing of gilts may have a larger effect on the price of gilts, than of other bonds. A significant fall in the value of gilts would cause a fall in pension fund valuations as these hold a large proportion of the gilts in issue (other than those acquired by the BoE). Falls in pension fund valuations will increase short falls on pension fund provision and place renewed pressure on company accounts.

The political effects of allowing interest rates to move up significantly now, or indeed anything more than a minor correction in the pricing of gilts, are likely to be unpalatable to the parties now in office before the next general election.

In summary I can see little reason to suppose that interest rates and bond valuations, are likely to move very far or very fast for some time to come. In the markets we have just experienced the usual 'Santa' rally, but the steam may run out soon, as it often does in the early spring. I think that the immediate direction for the market is very difficult to call, but it is easy to imagine a significant move to the downside in which case this would prove to be not the best of moments to migrate into equities!

It should be remembered that in Europe time has been bought for the Euro, but the underlying problems there still remain as before. In the States we have got past one step amongst many in the struggle between Obama and Congress, and in the wider world the struggle against Islamic extremism continues to broaden. The performance of the UK economy continues without lustre, and with no prospect of near term amelioration. These factors are all likely to disturb markets in the coming months. Unless your crystal ball is better than mine or you are prepared to lose your shirt on a single bet, it seems to me that the prudent choice must be to retain a well diversified balance of bonds and equities. As the return on fixed interest Gilts is at present below the rate of inflation my preference in the bond sector is for index linked instruments or relatively high risk commercial bonds.

The truth is I now regret taking my profits towards the end of last year as there is very little now available 'under par' that doesn't carry excessive risk.

Ultimately I believe governments shall have to allow inflation to take off to reduce the real value of their debt but that is probably a long way off as [as you have said] that could cause too much economic pain in the short term.

Having little experience of equities and only a few years experience of the corporate bond market I am feeling a little nervous as I do not like having too much cash lying around that is not earning me an income.

I am actually hoping that bond prices will fall and allow me to re-enter the market with reasonable yields but I might have to wait a lot longer than I had hoped.

I would not advise anybody to take out either of these two bonds as they are with a Dutch bank that is in trouble. They have to pay back a government bailout by the end of 2013 and were exposed to a lot of bad debts in the housing market though had a profitable insurance side.

I like to take occasional risks when I see a company is in trouble and when one bond was as low as 40 and the yield was 15.645% I perceived it as an opportunity and that if the bond defaulted I would not get back much less than I had paid (if somebody had bought at 100 then ~shock~ ~horror~ for them but not for me.)

The other I considered at 60 when the yield was 18.75%. Prices to sell are now 44.52 and 59.11.......... a lot down on Thursday 10th January when the prices were 54.80 and 74.19 - hence a huge change in the market value.

Invesco Perpetual Monthly Income Fund? I shall have a look at it and ask my broker if he thinks it worthwhile for me to invest in.

& Gov bonds. Any fund holding bankrupt Gov bonds I must sell. I have & checking HL Multi Manager Strategie bond, & M G optimal income- any suggestions please on these funds. I also have Kames High Yield bond- I am holding for at least for the whole yr.

Findings on the two bonds? I'm just doing my best to keep a cool head and not panic; the most likely situation is that interest shall continue to accrue on a daily basis - acting rashly in a panic does not bring security. I should have sold out on both bonds at a good profit but instead I just tried to sell a small amount (one sixth of one holding). I didn't. One bond I was very angry to have sold last year was with Europcar. I bought in at 60.25 and sold at 56 when the bond was downgraded and put on negative watch. The bond is now 94 to sell. That's life.

I did VERY well with Barclays with a 4.75% 'coupon' perpetual euro bond buying in 100k nominal at an average price of 50.98 and sold out at something like 66. They are now about 74 but I don't like to be greedy and the market could always have gone the other way and my substantial profits evaporated.

The problem is that now there is nothing attractive to me to buy in the corporate bond market; especially as I do not like to buy above par. My one exception was Heldelbergcement which I think I was bought at something like 102 and is now 120+. I sold out at about 112.

Nearly all the bonds I follow are now well over par (100) so I am having to wait out for the nexr downturn to reinvest.

After a long bull market that may have lulled many followers into complacency, I think we are coming into difficult times for western nation bond funds for reasons others have explained.

Strategic asset allocation and diversification can sometimes be expensive policies at the top of a bull market. Even if we stay in a low interest rate world for some years yet, there cannot now be much capital gain in bond funds unless individual special situations. Congrats again Robert in finding these!

Also when talking about "bonds", just what do you mean? I think it may pay now to be very selective. For those still keen on the asset class for income then it would seem prudent to either:-

- invest in bond funds of nations that do not have huge deficits and are financially strong (does the Aviva bond fund come into this category ?)

- if you must invest in UK Corporate bonds (I do not myself) then buy short dated intending to hold to maturity, so you do not lose capital if inflation and interest rates go up which will hit the longer dated issues.

There has been Trillions invested in bond funds in the last 10 years, so when investors shift asset allocation back to equities property or cash, watch out!

Many thanks to Pilgrim and John Osbourne for very informative posts. I think there are many who visit these forums that are invested into bond funds and would dearly like know the early 'watch out' signs. It is my understanding that run away inflation and creeping interest rates are not a friend to bonds, are there other indicators we should be on a sharp look out for?

DI, may I thank you for the tip and perhaps mock you with the name Afren, you sold when it dropped and I bought near their lo I have nearly doubled the money invested. Reckon a divi is not too far away........., maybe.

I too sold out of various things in last month or so, which have continued to climb. But taking profit means you have sure cash, and avod a suddoen big loss - you only "lose" the opportunity to make more, and can always go back in later.

I too sold out of various things in last month or so, which have continued to climb. But taking profit means you have sure cash, and avod a suddoen big loss - you only "lose" the opportunity to make more, and can always go back in later.

I too sold out of various things in last month or so, which have continued to climb. But taking profit means you have sure cash, and avod a suddoen big loss - you only "lose" the opportunity to make more, and can always go back in later.

I too sold out of various things in last month or so, which have continued to climb. But taking profit means you have sure cash, and avod a suddoen big loss - you only "lose" the opportunity to make more, and can always go back in later.

Slightly different for me. I don't know. I was 'locked in' to good yields.

There is 'nothing out there' that attracts me with a good enough yield and an acceptable risk. Nearly ALL the bonds I follow are now above par and would result in a capital loss if bought now and held to maturity.

I might have to wait some considerable time before prices come down enough to make it worthwhile for me to reinvest and I shall have to live off capital until that happens.

I note that a high proportion (around 55%) of the Aviva Bond fund appears to be invested in UK and USA government index linked bonds.

On the face of it, these give protection against inflation which is a good idea, but yield very little in real terms.

Would anyone buy them now at current values?

Or are their values in effect just a reflection of the attempt by insurance companies, and other big investors who have to buy bonds for regulatory reasons, to try to maintain the value of their portfolios on an inflationary myth that may not exist?

It smells of a bubble to me, Stuart Cowley has done well out of them so far, but are they going to go up more?

Again, with no end to the money printing in sight, one can make the argument that those in conventional government securities may switch more to index linkers.

There are some corporate bonds called 'floater' bonds that change their coupon each year. One such bond is the 5.052% AXA (FLOATER) 2011-49 denominated in EUR that changes its coupon each year after paying out on 20th December. It's rated BBB by Fitch. The coupon is calculated on something like 4 x the difference between the 2 year and 10 year eurobond rate capped at a maximum of 10% and a minimum of something like 3.6% (doing this from memory and don't have the formula to hand). The coupon went up on 20th December 2012 and the bond shot up in price from about 53 to 62 within 48 hours and is now about 84 to buy with a yield of just over 6% at that price.

I don't know. I like to be able to work out what my return is going to be to maturity and believe some of these floaters just put more risk with the investor as who knows what the coupon will be next year or in 'x' years time and a falling coupon plus a falling price would be a double negative for me.

Indexed to inflation? What measure of inflation? What if you want your money to grow in real terms? You'd want inflation + 'y' % plus the chance to make capital gains.

No, for me I prefer to know what I'm getting both at the time of purchase and what I'll get at maturity unless things go wrong and the corporate bond defaults.

My uneducated guess is that with most bond funds the risk is spread so far and wide and the management charges are so high that most people could do much better themselves.

Provided an individual investor has enough capital to invest in at least six or eight different bonds he/she can make a calculated risk and should do quite well in comparison.

Some bonds have minimum nominal trade amounts of 100k others as little as 1k. Buying 8k nominal of a bond that costs 60 to buy would cost only 4.8k plus commission plus any accrued interest.